Alphabet Boosts 2026 AI Investment to $205B, Signaling Further Capex Expansion Next Year

Google parent Alphabet reported quarterly earnings that beat market expectations, but its stock plummeted due to concerns over surging capital expenditures (CapEx) driven by expanding artificial intelligence (AI) infrastructure investments.

Driven by the increase in CapEx, Alphabet recorded negative quarterly free cash flow for the first time since its 2004 IPO and raised its previous guidance, stating that this year's capital expenditure scale is expected to increase up to $205 billion, or approximately 303 trillion won.

Alphabet announced on the 22nd local time that its second-quarter revenue rose 24% from the same period last year to $119.8 billion (approximately 177 trillion won).

This exceeded the market forecast of $116.9 billion compiled by the London Stock Exchange Group (LSEG).

By sector, growth in the cloud division was the most prominent.

Google Cloud revenue surged 82% year-over-year to $24.8 billion, boosted by rising demand for enterprise AI and infrastructure.

The cloud division revenue also included, for the first time, sales generated from selling its self-developed AI chip, the Tensor Processing Unit (TPU), to external customer data centers rather than Google Cloud itself.

The search and YouTube advertising divisions, which act as cash cows, posted growth rates in the 10% range, recording $63.2 billion and $11.1 billion in revenue, respectively.

However, revenue for the other bets segment, which includes autonomous driving taxi Waymo, remained at $382 million, posting an operating loss of $1.8 billion.

Earnings per share (EPS) stood at $9.11, more than triple Wall Street's expectation of $2.89.

Regarding the increase in other income that drove the sudden surge in EPS, Alphabet explained that it was "attributed to unrealized net gains on equity securities."

This is interpreted as being driven by an increase in the value of equity stakes held by Alphabet following the IPO of Elon Musk's space company SpaceX and a rise in the valuation of AI firm Anthropic.

The closely watched second-quarter capital expenditure was around $44.9 billion, or approximately 66.3 trillion won, which was in line with the market estimate of $44.8 billion compiled by StreetAccount.

Alphabet's capital expenditures hovered between $22 billion and $24 billion in the second and third quarters of last year, before reaching $28 billion in the fourth quarter and $36 billion in the first quarter of this year, and have now risen further.

Chief Financial Officer (CFO) Anat Ashkenazi stated during the conference call, "We are raising our total capital expenditure guidance for fiscal year 2026 from $180 billion to $190 billion to a range of $195 billion to $205 billion."

She added that the increase in capital expenditures is to meet growing AI demand and that capital spending will expand significantly next year as well.

In the wake of continuous capital expenditures, second-quarter free cash flow (FCF) recorded negative $5.86 billion.

Alphabet recorded more than $24 billion in FCF in the third and fourth quarters of last year, but it dropped to the $10 billion level in the first quarter of this year before turning negative this time.

This means that cash spent on investments in plants and equipment exceeded the cash generated from operating activities.

According to Stansberry Research, this is the first time Alphabet (Google) has posted negative quarterly FCF since its IPO in 2004.

However, the cumulative FCF for the trailing 12 months stood at $53.3 billion.

The debt scale also increased significantly due to successive bond issuances to secure funds for AI investments.

CFO Ashkenazi explained that the debt scale, which was around $16 billion a year ago, has recently increased to a level approaching $100 billion.

CFO Ashkenazi elaborated that this steep rise in debt scale was the background for the paid-in capital increase conducted last month.

Chief Executive Officer (CEO) Sundar Pichai emphasized, "Our AI investments are redefining the horizons of possibility across every area," adding, "These outstanding results show that our differentiated full-stack AI approach is delivering practical and measurable value to our customers."

CEO Pichai introduced that about 90% of Fortune 100 companies have adopted the enterprise Gemini model, and the monthly active users (MAUs) of the Gemini app have reached 950 million.

He also added that application programming interface (API) tokens processed by the Gemini model reach 22 billion per minute.

Alphabet's Class A common stock closed down 1.46% in regular trading on the same day, but fell more than 3% further in after-hours trading following the earnings release, fluctuating around the $331 level as of 7:00 PM Eastern Time.

(Photo: AP, Yonhap News)
※ Please note: This article was translated by AI and may contain errors.